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Thursday, June 2, 2011

AUD/USD: Cheap Imported Goods!

Hey there,

First of all, OUCH..... Markets took a very painful hit today. A lot of negative sentiment going around at the moment, bad ju ju, bad vibes, bad everything. Just look at what happened this last 5 days.

Not too bad, not too bad, not bad, hmm not bad I guess, then BOOM!

Gosh I spent the last few days typing thousands of words for my assignments, my fingers are probably as strong as my biceps now.

Anyways, I was on Facebook and one of my friends asked me about my drum pedals. I have Iron Cobra double kicks by Tama and I got them more than a year ago now. When I got them they were I think about 600 dollars. They were one of my best investments as far as drum sets go. Brilliant pedals, makes double kicking so much easier. Assuming my friend got the same model, apparently he got it for 300 dollars yesterday. That is half the price! To be honest I felt cheated but then something came to my mind:

AUD/USD.

A year ago, 1 AUD was buying a bit over 0.80 USD. Today it is buying 1.06, good for people holding their AUD and sorry to people with USD.

This strong AUD has massive impacts on the Australian economy. Just like what my friend has experienced, it is suddenly very cheap to import things to Australia. So importers and retailers can have a massive boost to their margins if they maintain their prices. Alternatively, they can choose to offer massive discounts without affecting their margins too much. So to use the drum pedals as an example, if the cost of the pedals are 400 USD in America, when I bought them at the exchange rate of 0.8 it would have costed 500 AUD to import. When my friend bought it yesterday, 400 USD would only be 377 AUD. That is a 123 dollar difference just for one pedal. Imagine how much cost retailers save because they import in bulk.

However, it is important for us to remember that this is not necessarily a good thing for Australian retailers in our day and age. I didnt ask my friend but I bet he bought it from some American online store. So how much of it goes to the Australian economy or Australian retailers? 0 dollars. But online shopping is probably a topic saved for another day.

On the flip side, exporters are feeling the pain. Take Billabong for example, BBG makes 50% of its revenue from sales in the USA. So a year ago, to make it easy, lets say their sales in America was 10 million USD, that will mean their revenue in AUD is 12.5 million. Today if they made that same 10 million in USA, it would only be worth 9.4 million AUD. That is 3.1 million AUD less just because of the strong AUD. Please note that these numbers are made up to illustrate an example. I have no idea what BBG’s revenue from USA was yesterday or a year ago.

For those of you who are going away for holidays, I’m sure you’re very pleased that the AUD is doing so well. All of a sudden it is cheaper to travel. But also think about the poor tourism industry in Australia. It is suddenly so expensive to travel here. Same goes for education, I didn’t think about going to the UK to study medicine because it was too expensive to do so back then but today, it is probably just as expensive to study here in Australia. I even remember hearing in the news that movie production companies in Australia is not doing too well because of the strong dollar. Producers and directors use to like coming to Australia because it was cheaper and Australia offers magnificent sceneries for their movies but it is too expensive for them to come here now. The use of green screens and animations are probably easier and cheaper.

So think about that, strong AUD = good for importers, bad for exporters.
Good for getting out of Australia, bad for coming to Australia.

What do you think about the strong AUD? Is it sustainable? Or is it going to drop back down. Are you enjoying the strong AUD? Or are you hating it? Do leave me comments or send me emails. I really do appreciate them.

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